The tug of war between the rate-cut gambit and the earnings-momentum model has now taken center stage. On the one hand, we have the burning desire to be in the cleanest, most bulletproof earnings situations, no matter how expensive. And on the other, we have the nagging sense that we should be in the cheapest stocks that have been hammered mercilessly, but might benefit immediately from a rate cut.
I know I feel it every day. I want to be in
because it is clean and neat and not at all messy. I want to own
and I do, because it has great revenue growth and is a dominant player. But I am paying huge amounts to own these stocks. I am paying "top dollar" for certainty. And if they turn uncertain, a la
Procter & Gamble
(which I am short), I can lose a fortune.
On the other hand, who in his right mind wants to be in
Washington Mutual Savings
? It is getting killed from high short rates and low long rates, and estimates come down almost hourly. Hold it, though: Unlike Coke, it is dirt cheap -- so cheap that it may not go down much more on estimate cuts. And if the
eases -- "to the moon, Alice, to the moon," with WAMU.
That's why I am trying to build a mix of rate-cut names and bulletproof names, but I am leaning more toward rate-cut names because the upside is much bigger and the downside, at this point in the cycle, is much smaller.
Of course, some stocks escape the dichotomy. Those that have a product cycle, like the
Pentium II, or a potential price increase, like the disk drives, can be bought without regard to Fed concerns. I know that sounds glib, but after last night's
call, I just keep feeling better and better about tech. (And what is this sales-lag stuff on the site? That's just silly. I am long 3Com, and I was very pleased by these numbers --
as was everyone else I know
But I know that what is most painful to own right now may turn out to be the most bountiful to own a few weeks from now, if we can only nail down that a rate cut is coming. Take
. Stock got hammered on estimate cuts, but then rallied. Why? Because the market likes commodity plays on the heels of a rate cut. You can't be short Carbide if you think the Fed is going to ease. There will be too much pain.
The savings and loans are more stark. I own
, which is the largest independent savings and loan in San Francisco. (I have a public filing that shows my owning 9% of the savings and loan.) Earnings get cut every single day for this savings and loan because it has had such massive prepayments of mortgages. The Street hates the darn thing. It has been cut in half on estimate reductions to the point where it trades at book. And I am underwater in the stock because I have jumped the gun on a potential rate cut. I saw one coming too far away, before it was reasonable to act. It is a whites-of-their-eyes situation, and I started shooting when I first heard the rate cut coming. Yes, I should have waited. But the alternative -- to not be in -- seems wrong to me. Both are costly.
If there is a Fed rate cut, everyone who hates Bay View and all of the other S&Ls now will love them, and numbers will immediately go up, not down. I can't wait for the Street to change its collective mind. I have to act ahead of the cut. Or I will miss the big move. However, the longer the cut is delayed, the more at risk I am to more estimate cuts. That's why the emphasis on what the Fed will do is so important. A whole group of hated stocks will get loved when the Fed moves. And vice versa. But until then, you have to hope, like Carbide, that there are no more estimate cuts between now and the Promised Land of a Fed ease.
Nice game of chicken, don't you think?
, the only man I trust when it comes to the Fed, says a rate cut may be in the cards in this morning's
. Sounds like a good bet.
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com.
At the time of publication, his fund was long Bay View, Washington Mutual Savings, Microsoft, Intel, 3Com and Schering-Plough and short Coke, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at